TWO men accused of being members of a terrorist group discussed killing children, "innocents" and the Prime Minister and his family, prosecutors say.

One of them, Abdullah Merhi sought religious guidance on when it was acceptable to kill and agreed that if thousands died the Federal Government might be swayed into pulling troops out of Iraq, prosecutor Nicholas Robinson told the Melbourne Magistrates Court yesterday.

Merhi and fellow accused Hany Taha, 31, remained in the Barwon Prison last night after losing their bid for bail. They have been in custody since being arrested on November 8 in raids across suburban Melbourne.

The court heard that in September last year, Merhi told the alleged ringleader of the terrorist group, Abdul Nacer Benbrika, that his eyes had opened to how non-Muslims "have got control of us all over the world".

Merhi, who has been accused of harbouring an ambition of becoming a suicide bomber, was allegedly overheard telling Benbrika he was impatient to take action: "I am not waiting 20 years, or two years."

Mr Robinson told the court that Merhi was heard asking: "For example, if John Howard kills innocent Muslim families do we … have to kill him and his family … or someone else, like people at the football?" Benbrika allegedly replied: "If they kill our kids, we kill … little kids … innocent ones."

At another point Merhi said: "Sometimes, I have got doubts. If I do this, is it pleasing to Him? Am I doing wrong?" Benbrika allegedly replied: "No, you are pleasing Him because they are killing our brothers."

The men allegedly were heard discussing how they did not trust another religious leader who was critical of the campaign waged by Osama bin Laden, and the possibility that the man had spoken about the group to police. The mention of the man's name caused Benbrika to spit and to suggest that "two brothers" abduct him, drive him to the bush and learn the truth.